How many tens of millions did the Government waste on the single biggest asset disposal in 2012?

[Here’s the 30 second version – last year AIB sold €660m of loans to US company, Lone Star. If these loans had been acquired by NAMA instead, then a premium would have been paid which NAMA says it can recoup by 2020 as property markets improve. We own 99.8% of AIB. So we lost out on that premium, which we gifted to Lone Star. Minister Noonan controls the 99.8% stake in AIB on our behalf]

Communications minister Pat Rabbitte, who last week accused the media of “all-pervasive negativity”, might want to stick his fingers in his ears and ululate la-la-la for the next few minutes, because there is nothing positive in the following to reflect on his Government’s oversight of what was probably the largest disposal of state assets in 2012.

First though, cast your minds back to 2009 when NAMA was being set up. Remember it was originally going to acquire €77bn of bank loans and pay €54bn for them. Remember the hullaballoo about “Long Term Economic Value” – NAMA was not going to pay just the market value of the loans it was acquiring, but it was going to pay a premium on top of the market value to reflect the fact that we were supposedly at the bottom of the market, that the banks were distressed and that NAMA would turn a profit by managing the loans in a recovering economy? Long Term Economic Value (LTEV) was one of the most controversial aspects of the NAMA project and back in 2009, it was estimated that the €54bn that NAMA would pay for the loans, would comprise market value of €47bn and LTEV of €7bn. In the event, NAMA now says that it has paid €5.6bn of state aid when it acquired the loans, which mostly comprises LTEV. All clear so far?

And remember what NAMA was set up to do – acquire property loans from certain banks, pay for those acquired loans with NAMA bonds which banks could exchange at the ECB for crisp new cash, NAMA would manage those loans and by 2020, it would have made a profit of €5.48bn, that was the plan! The “NAMA bonds” are no more than paper IOUs approved by the European Commission as the means of funding the purchase of loans, and NAMA must pay the holder of the bonds interest annually, presently a little over 0.75% per annum. The European Commission approved a NAMA scheme which allowed NAMA issue €54bn of bonds plus an additional €5bn of bonds to support development of the loans – €59bn in total. To date, NAMA has issued €32bn of bonds and redeemed just under €5bn.

What has any of this to do with what was probably the largest disposal of state assets in 2012?

Cast your mind back to October 2012, when, as part of its deleveraging commitments, AIB sold €660m of loans to US investor Lone Star, these were 70 loans secured on “400 properties, including hotels, nightclubs, shopping centres and offices both in Dublin, the single largest geographic concentration, and the Irish regions.” When the Sinn Fein finance spokesperson Pearse Doherty tried to quiz Minister for Finance Michael Noonan on the deal, he was mostly told to get lost because it was confidential.

But there is one aspect of the deal that we can readily surmise.

No Long Term Economic Value was paid to AIB by Lone Star!

Now, drawing all of the above together, NAMA, which was set up to acquire property loans – in fact NAMA can acquire any loans it deems systemic – NAMA, which still has over €22bn of unused NAMA bonds which cost the Agency a measly 0.75% per annum when issued and NAMA which pays about 10% LTEV as a premium on the market value of loans, sat back and watched Lone Star buy €660m of property loans from AIB.

In October 2012, we were even more at “the Bottom” than we were in 2009 when NAMA was set up. So what the owner of 99.8% of the shares in AIB – that’s Minister Noonan! – did, was to approve this transaction which saw Lone Star paying the market value for the loans and no more, while we had another Agency standing by which specializes in managing property loans, which has the funds and the resources to manage these loans, and which is set up to manage the loans so as to break even on its purchase price by 2020.

How much LTEV would NAMA have paid for the €660m of AIB loans? Difficult to say – NAMA has typically paid 10% on top of the market value of the loans. But as Minister Noonan refused to tell us what that market value was, we can only speculate. The average discount applied by NAMA to €19.3bn of AIB loans acquired by the Agency for €8.6bn was 55% which would indicate a LEV of €27m – roughly what the cut in the respite grant will save this year.

All of this might seem quite convoluted but it distils to our Government overseeing another tens-of-million loss at our state-owned banks whilst another agency, also overseen by the Government, set up to acquire and manage loans and break even by 2020 stood by.

If Pat Rabbitte was in Opposition still, he would be calling the Government a bunch of clowns. Don’t worry Pat, continue this standard of governance and you’ll be back there soon enough.

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8 Responses

If the discount applied to the loans bought by Apollo from Lloyds/Bank of Scotland Ireland (at close to 90%) are any guide then indeed many millions have been lost. Granted the Apollo deal was neary three times bigger in nominal value but the geographic and property sector spread looks similar.

Can NAMA re-issue bonds? Probably not the correct term but could it issue 22bn + 5bn development loans + 5bn previously redeemed?
32bn @ 0.75% that could come in useful for say a domestic mortgage crisis?

@Niall, not sure about re-issue, this is what the NAMA Act says in Section 50

“(3) The aggregate of the principal of all sums outstanding for pur-poses other than the provision of consideration for the acquisition of
bank assets shall not exceed\5,000,000,000 or such other amount
that the Minister specifies by order for the purposes of this
subsection.
(4) The aggregate of the principal of all debt securities issued to
enable the provision of consideration for the acquisition of bank
assets shall not exceed\54,000,000,000 or such other amount as the
Minister may specify by order for the purposes of this subsection.”http://www.attorneygeneral.ie/eAct/2009/a3409.pdf

This criticism only holds up if you assume that Nama will turn a profit on the loans. But the more loans Nama acquires, the more it needs to sell – within an ever decreasing period of time. That can only drive down the sale prices Nama achieves and make any profit increasingly less likely. Unlike wine property assets cannot easily be turned into something else or poured down the drain. Surely Nama needs to get on with the disposal of assets rather than further stockpiling.

@Felicity, save for the NAMA subordinated bonds which comprise 5% of the loan acquisition value, Minister Noonan and NAMA are forever saying they are “confident” of breaking even which means covering the c10% LTEV paid to acquire the loans. There is skepticism here about that confidence which really hinges on how our property markets perform in the next eight years, but if Minister Noonan is consistent, then selling the AIB loans to NAMA would have saved the state millions.

@Fergus, if it can be simplified for you – “you don’t buy a dog and bark yourself” and having set up NAMA with a 10-year lifespan, obtained EC approval for the NAMA scheme which allows NAMA issue €54bn of bonds to buy loans including systemic loans, you don’t then have the 99.8% state-owned AIB sell €660m of loans to a private investor, Lone Star.